BitOffer Institute: Decentralized Options - the Next DeFi Hotspot and Lifesaver

[Cici Lee]

Source From BitOffer

DeFi has a total market cap of $13.022 billion, according to Glassnode, it covers a wide range of sectors including currencies, loans, synthetic assets, instrument architecture (such as forex), exchanges, etc. However, there is a large gap in the derivatives area, such as options. Thus, Institutions such as FinNexus and Chainlink predict that decentralized options will be the next DeFi hotspot, which could be the lifesaver of the Bitcoin contract.

DeFi decentralized options address the crucial points of current decentralized options and the points about investor participation in traditional finance.

1. In essence, an option is a kind of contract that gives the option holder the right to buy or sell an asset at a fixed price on a specific period. The buyer of the option has only rights but no obligations, and the seller of the option has only obligations but no rights. The risk of the buyer is the loss of capital to gain the unlimited potential of profit. The risk of the seller is to earn the option premium under the unlimited potential of loss. The imbalance of such rights and obligations leads to the difference between the risk attributes of the buyer and the seller.

2. Even if there are professional institutional participants, as sellers, in order to control their own risks, they still need to rely on abundant risk hedging tools to hedge their potential risks. At the moment in the DeFi market, it is clear that the selection of these hedging instruments is very scarce.

3. Traditional options are matched by order books and need to rely on professional market makers, which, if carried out in the chain, will cause problems of low efficiency and high cost. Recently, the GAS fee on Ethereum has reached 300Gwei, and the high cost will greatly reduce the enthusiasm of users to participate.

4. Due to the liquidity, for the buyer, the option buyer cannot choose the option products as they expect, such as different underlying assets, different strike prices, or products with an expiration date.

In view of these problems, the decentralized liquidity options of DeFi arising subsequently. By establishing the liquidity option deposit pool as the counterparty of all users who purchase options. The premium and other agreements rewards are brought into the pool and share by the joining users, all the returns and risk of investment options will also be borne by the entire pool of users.

The potential of decentralized option flow pools is that it can freely create options with the underlying asset, which not only the digital currencies such as BTC but also the traditional financial assets. Compared with the centralized options, it eliminates the middleman and counterparty, has unlimited liquidity, and the ability to pledge mines.

With the popularity of DeFi decentralized options, the trading strategy of hedging with options and contracts will be used by more people to reduce the risk of being liquidation. After the option hedging, even if the contract is under liquidation, the profit is still far greater than the contract principal, thus, the profit can be maintained eventually.

Here is a detailed description of the hedging strategy of making money under contract liquidation.
For example, now the Bitcoin price is $10,000:

• Open long 20X Bitcoin at $800
• Meanwhile, buy 2 put options contracts on BitOffer (the total budget is $60).

✅ The first situation: When the Bitcoin price increases by $200 (+2%):

• Open long 20X Bitcoin: Earning 40% in profits, $320.
• Lose the premium that you use to buy put options contract: -$60.
• The net profit will be $320-$60= $260.

✅The second situation: When the Bitcoin price decreases by $200 (-2%):

• Open long 20X Bitcoin: Losing 40%, $320.
• The Put Options contracts You buy earn $400.
• The net profit will be $400-$320–$60=$20.

This is only one of the strategies of the contract, there are many other strategies that I won't show you here. To sum up, the hedging strategy could help us profitable no matter it’s ups or downs, even when the contract hit the liquidation.

However, it should be noted that the options that we’ve mentioned in this article specifically refer to the BTC options (American version) without margin, commission fee, and liquidation mechanism, which are  issued globally by BitOffer Exchange . If you choose traditional European options such as from OKEX and JEX, you cannot carry out such contract hedging, and there is a liquidity risk as well.